The deal reflects the continuing success of the joint venture, which is delivering efficiency. This was a major asset in the Bank of Scotland's bid for NatWest, although ultimately unsuccessful.
First Banking Systems was touted as a blueprint for customer-supplier relationships in the IT industry when it was formed in June 1998. The aim behind the launch was to improve efficiency and adopt a more competitive approach within the Bank of Scotland's technology unit.
The bank committed 310 staff and a £150m contract for IT services over five years while FI contributed 120 consultants. The bank took a 51% controlling stake in the business and, following a benchmarking exercise in year one, set a goal of improving efficiency by 15% against the baseline in year two and by a further 5% in year three and in subsequent years.
The joint venture charges the bank at commercial day rates and the profits are split according to ownership. Staff within First Banking Systems can progress up the FI career ladder.
FI and the Bank of Scotland say that the joint venture has been extremely successful. The bank's commitment in October 1999 to additional work amounting to £61m over three-and-a-half years and the latest £190m contract add weight to that view.
In addition, during the NatWest takeover battle three external audits, including two for the banking regulator, stated that First Banking Systems offered upper-quartile technology performance and that it could achieve its stated intent with regard to IT within NatWest.
Without the joint-venture company the Bank of Scotland would have been unlikely to launch its takeover bid for NatWest.
That the joint venture has been a success is not in doubt. Aside from the measurable improvements in performance, the move to a commercial atmosphere within the IT department helps in the development of systems to compete in the banking sector, which faces competition from Internet start-ups, for example.
Although FI and First Banking Systems were unavailable for comment, it seems likely that the next move for the joint venture will be to offer services outside the Bank of Scotland. In addition, it is likely that IIS, FI Group's Indian software operation, will be drafted in to reduce the cost of development.
The formation of First Banking Systems is one example of how suppliers and users can form partnerships that genuinely share risk and reward. It can be seen as a halfway house between in-house and outsourced IT.
But due to the complexity of the deal and the costs involved in setting it up, the structure is unlikely to appeal to small to medium-sized enterprises.
Ian Mitchell is an IT analyst with stockbroker Beeson Gregory. His opinions should not be construed as investment advice.